Development History and its Implications for Development Theory:
An Editorial

by Irma Adelman and Cynthia Taft Morris

In this editorial, we shall restrict the use of the term
economic development to widespread, widely shared, sustainable
economic growth accompanied by significant structural change in
production patterns and in economic and political institutions and
by generalized improvement in living standards. This definition
distinguishes economic development from economic growth that is
narrowly based; dualistic in production and distribution; cyclical;
grounded in the exploitation of natural resources; and
unaccompanied by systematic changes in production structure,
institutional development or improvement in the living standards of
the poor.

I. Development Theories Contrasted

Both the modern pioneers of development economics (Rosenstein-
Rodan, Chenery, Hirshman, Leibenstein, Lewis, Myrdal, Nurkse,
Rostow, Scitovsky and Streeten) and the neoclassical development
theorists (Bhagwati and Krueger) view economic development as a
growth process that requires the systematic reallocation of factors
of production from a low-productivity, traditional technology,
decreasing returns, mostly primary sector to a high-productivity,
modern, increasing returns, mostly industrial sector. But while
neoclassical development economists assume that there are few
technological and institutional impediments to the requisite
resource-reallocation, the development pioneers assumed that the
resource reallocation process is hampered by rigidities, which are
both technological and institutional in nature. Investment
lumpiness, inadequate infrastructure, imperfect foresight, and
incomplete and missing markets impede smooth resource transfers
among sectors in response to individual profit maximization and
provide the bases for the structuralist approaches to economic
development of the modern development pioneers.

The modern development pioneers emphasized that long-run
economic growth is a highly non-linear process. This process is
characterized by the existence of multiple stable equilibria, one
of which is a low-income-level trap (Leibenstein, Rosenstein-Rodan
and Nurkse). Developing countries are caught in the low-income-
level trap, which occurs at low levels of physical capital, both
productive and infrastructural, and is maintained by low levels of
accumulation and by Malthusian population growth. Industrial
production is subject to technical indivisibilities, which give
rise to technological and pecuniary externalities (Rosenstein
Rodan and Scitovsky). However, coordination failures lead to the
realization of systematically lower rates of return from
investments based on ceteris paribus, individual, profit
maximization than from those that could be realized with
coordinated, simultaneous investment programs. Uncoordinated
investments do not permit the realization of the inherent
increasing returns to scale and, together with low incomes, which
restrict levels of savings and aggregate demand, and Malthusian
population growth, ensnare an economy starting at low levels of
income and capital in a low-income-level trap (Rosenstein Rodan,
Nurkse). Hence the need for government action to propel the
economy from the uncoordinated, low-income, no-long-run-growth
static equilibrium to the coordinated, high-income, dynamic-
equilibrium, golden-growth path.

Neoclassical development theorists emphasize that
international trade can provide a substitute for low domestic
aggregate demand. They argue that the only things governments need
to do to position an economy on an autonomous, sustained-growth
path is to remove barriers to international trade in commodities.
Comparative advantage, combined with the Hecksher-Ohlin theorem,
will then do the rest. Subsequent amendments to this position add
the requirement of removing price distortions in domestic factor
and commodity markets ("getting prices right") to the list of
government actions required to induce suitable movements of factors
among sectors, encourage the adoption of appropriate technology,
and increase capital accumulation. In this view, domestic and
international liberalization programs suffice to bring about
sustained economic growth and structural change.

The modern development pioneers were not unaware of the
potential of international trade for stimulating economic growth.
Their first counterargument against the "trade will do the job"
view was elasticity and terms-of-trade pessimism, based on the
cyclical growth process induced by the Industrial Revolution in the
overseas territories prior to World War II (Prebish and Nurkse).
The proponents of the "trade is not enough" view also argue that
even if, in principle, trade could expand sufficiently to provide
the necessary growth stimulus, trade by itself will not do the job
because: (1) non-price barriers militate against the smooth
transfer of resources among sectors in response to individual
profit maximization (Chenery and Hirshman); (2) in the absence of
government action, the divergence between rates of return from
uncoordinated and coordinated investments entangles the economy in
the low-income trap (Rosenstein Rodan, Leibenstein and Nurkse); (3)
the necessity to learn-by-doing implies the need for some initial
infant-industry protection; and (4) non-tradables, in the form of
physical and social infrastructure, are required to enable
competitive domestic industry to emerge. Both the physical
infrastructure, in the form of transport and energy, and the social
infrastructure (Abramowitz), in the form of property rights, market
institutions, social and political structures, and economic and
political cultures are lumpy, and hence subject to increasing
return to scale. Neither form of infrastructure will therefore
emerge spontaneously in response to uncoordinated, market-oriented
incentives. In the view of the classical development economists,
the conjunction of these factors leads to the need for government
actions to initiate the process of economic development. In the
absence of appropriate government intervention, the Hecksher-Ohlin
theorem will not prevent the emergence of a low-income equilibrium
trap.

A different, more recent, underdevelopment theory associated
with the Chicago endogenous-growth school, identifies low-human
capital endowments as the primary obstacle to the realization of
the potential economies of scale inherent in the industrialization
of developing countries. The productivities of raw labor and
capital are assumed to be magnified by a factor, A(k)a , that
reflects the levels of human capital and knowledge, k. There are
different potential dynamic growth paths open to countries: At one
extreme, identified with low levels of human capital and knowledge,
economic growth is characterized by low degrees of economies of
scale; the corresponding growth path is therefore a low-factor-
productivity, low-growth one that tends to a stationary state
characterized by low per-capita income levels in the long run. At
the other extreme, identified with high levels of human capital and
knowledge, economic growth is subject to significant increasing
returns to scale; the corresponding growth path is a high-factor-
productivity, high-growth one that tends to a stationary state
characterized by high levels of per-capita income. According to
this view, investments in human capital and knowledge are therefore
all that governments must undertake to propel developing countries
from a low-growth trajectory to a high-growth one.

The "human capital is enough" development theory is open to
objections which are analogous to the ones raised against the
"trade is enough" development theory: (1) non-price barriers
militate against the smooth transfer of resources among sectors
that is necessary to take advantage of potential scale economies;
(2) missing and incomplete markets, especially for capital, are
likely to impede private individuals from undertaking the
investments necessary to take advantage of potential scale
economies; (3) appropriate trade policy is required to bring about
the realization of the potential economies of scale inherent in
industrialization: the necessity of learning-by-doing implies the
need for some initial infant-industry protection, while the low
aggregate demand induced by low income levels implies the need for
export-led growth; and, last but not least, (4) physical and
institutional infrastructures are required to enable competitive
domestic industry to emerge. Both forms of infrastructure must be
provided by modernizing governments if the economies of scale
posited by the Chicago production function are to materialize.

II. Comparative Development History and Comparative Development.

To help evaluate the relative merits of alternative
development theories we shall devote the rest of this essay to
synthesizing the major implications of development history for
development theory. For this purpose, we shall draw upon our work
Comparative Patterns of Economic Development 1850-1914 (Morris and
Adelman, 1988) and Society, Politics and Economic Development- A
Quantitative Approach (Adelman and Morris, 1967). These works
apply systematic econometric analyses to the study of interaction
patterns among social, political, and economic institutions,
economic policies, and various aspects of economic development. In
these studies, countries are grouped into relatively homogeneous
groups, defined by either a common process and common initial
conditions (Morris and Adelman, 1988) or by a range of
institutional development (Adelman and Morris, 1967). Together,
these works cover the two golden eras of economic development: the
Industrial Revolution and the Post War II period between 1950-65.

Comparative history and comparative economic development
provide the following four major lessons:

First, the process of economic development has been highly non-
linear and highly multifaceted.

Our research into patterns of growth during the two eras of
accelerated global economic development, the late 19th century
industrializations and the post World War II golden era of
economic development, contradicts the proposition that all
countries have undergone similar patterns and sequences of economic
and institutional change.

Historically, one can discern at least four distinct
development paths: (1) the autonomous export-led industrialization
path followed by the firstcomers to the Industrial Revolution,
Great Britain, Belgium and France, in which successful
industrialization started from high-productivity agricultural
systems, highly developed market institutions, and political
institutions that limited the power of agricultural elites; (2) the
government-led, inward-oriented industrialization path followed by
the large latecomers to the Industrial Revolution, Germany, Italy,
Japan and Russia, in which success with industrialization before
World War I varied greatly. These countries were institutionally
less advanced than the firstcomers, started with significant
impediments to labor mobility and incompletely unified commodity
markets; had less productive, sometimes even backward, agricultures
and land tenure institutions less favorable to the diffusion of
agricultural innovations; and had political institutions in which
modernizing indigenous entrepreneurs, businessmen and workers, at
best, shared power with landed elites. During the 19th century
these countries thus resembled today's developing countries. (3)
the balanced-growth, open economy, limited-government-intervention
path pursued by a few small European countries, Denmark, the
Netherlands, Switzerland and Sweden. In these countries,
agricultural productivity growth kept pace with industrialization
and there was rapid growth of skill-intensive, internationally
competitive exports. These countries started with unusually
favorable market institutions and human resources; well functioning
parliamentary systems; high-productivity agricultural sectors; and
favorable land-tenure systems that provided for a well distributed
agricultural surplus and farmer-incentives.(4) the agricultural,
primary-export oriented, sharply dualistic path, pursued by both
land-abundant (Australia, Argentina, Canada, and New Zealand) and
densely populated (Burma, China, Egypt and India) countries. The
countries in this group varied in ultimate development success
according to their natural resource endowments and degrees of
government autonomy from domestic traditional elites and colonial
powers. The land-scarce countries with low-productivity in food
agriculture attained very little modern industrial growth, and
experienced negligible increases in per capita incomes and massive
poverty. The land abundant countries in which the political power
of expatriates, landed elites and export-interests remained strong
had cyclical, dualistic growth, with little structural change and
generalized improvement in living standards. Only those land
abundant countries in which small farmers, domestic manufacturers
and labor eventually attained political power (Australia, Canada,
and New Zealand) accomplished some economic development before
1914. There, the impetus from export expansion also spread to the
domestic economy; a domestic market for the growth of small
industry emerged; the economic and political institutions of modern
capitalism evolved; and the growth of exports and average incomes
ultimately reduced poverty.

Along the same lines, in contemporary developing countries we
found that the interaction patterns among economic and
institutional changes differed sharply among countries
characterized by different institutional, social, and economic
initial conditions. In the 40% of developing countries that were
at the lowest end of the spectrum in socio-economic development,
the economic growth process principally entailed an interrelated
process of economic and social transformations. This group of
countries has been characterized by minimal degrees of development
of market institutions and political systems and by a preeminence
of social tribal influences over the economic activity of the
predominantly subsistence agrarian economy. The process by which
economic growth was induced in this low-development group of
countries has entailed the dualistic development of a modern,
export-oriented, primary sector which provoked significant
transformations of social structure, the diffusion of the market
economy and the reduction in the sway of traditional tribal customs
over economic activity.

In the next group of transitional economies, that were
intermediate in socio-political and economic degrees of
institutional development, the process of social, economic and
political modernization had proceeded far enough to profoundly
disturb traditional customs and institutions without progressing
far enough to set them on the path of self-sustained economic
development. Dualistic industrialization, the buildup of economic
institutions, particularly financial systems, and of physical
infrastructure have dominated the explanation of intercountry
differences in rates of economic growth for this group of
countries. There was no longer evidence of a direct systematic
impact of changes in social structure upon rates of economic
progress; and neither the precise form of the political system nor
the extent of the leadership's commitment to economic development
played an important role in influencing growth rates in this
transitional group, perhaps because the specific patterns of socio-
political progress varied substantially among clusters of countries
in this transitional group.

Finally, in the third most developed group of developing
countries, the crucial forces accounting for intercountry
differences in economic performance were the effectiveness of
economic institutions and a cluster of variables indicating the
extent of national mobilization for economic development. This
cluster combined the extent of leadership commitment to
development, the rate of industrialization, the investment effort
and the extent of technological modernization in agriculture and
industry.

Thus, both contemporary and historical development experiences
suggest rather strongly that different economic, institutional and
political processes are important in countries characterized by
different economic and institutional initial conditions.
Corollaries of this proposition are that : (1) a single
theoretical framework, unless highly non-linear, is not likely to
offer an equally good explanation of the development process over
the entire range of development experience; (2) a single-factor
theory of underdevelopment is likely to apply moderately well to
only a small range of countries; (3) there is a strong presumption
that all developing countries cannot be combined together into a
single sample for purposes of econometric analysis, since
observations at different levels of institutional and economic
development are drawn from different universes; and (4) policy
prescriptions based on generalizing across countries at very
different levels of socio-institutional and economic development
are likely to be seriously misleading.

The second lesson of comparative history and development is
that institutions (a) matter most in explaining which transitional
became developed economically and which did not; (b) matter
greatly in explaining which countries among those having similar
initial conditions perform much better than others; and (c) affect
development in a very non-linear fashion.

(a) Domestic institutions have been the most important
differentiators between those countries that have ultimately
succeeded in attaining widely spread and widely shared economic
development and those that have not.

Countries that industrialized first had the most developed
market institutions, very favorable land tenure systems,
considerable human resources and political systems responsive to
capitalist interests. Among the latecomers to the Industrial
Revolution during the second half of the 19th Century, the
Industrial Revolution technology spread faster in Germany and
Italy, where market institutions were more developed in 1850, than
in Japan and Russia, and in Germany than in Italy. In Germany
primary education was significantly more widespread than in Italy;
land was more widely farmed by independent owner-cultivators as
opposed to small-holder, short-term tenants; and the German
government played a much more aggressive developmental role: it
unified the country economically through the creation of a customs
union and extensive investment in inland transport; and it
subsidized, owned or directly participated in a considerable number
and variety of transportation, financial, and industrial
enterprises.

During the golden era of economic development, between 1950
and 1973, those developing countries that had the most advanced
economic and political institutions were the major beneficiaries
from the strong growth-impetus imparted by trade with developed
countries. The top third institutionally most advanced LDCs in
1950 had an average rate of growth of per capita GNP about 50%
higher than the average growth rate of the non-oil countries at
intermediate levels of socio-institutional development, and more
than twice the average rate of growth of the socio-institutionally
least advanced non-oil countries. Furthermore, by 1973, the
overwhelming majority of countries that were institutionally most
advanced in 1950 had become semi-industrial countries, and four
institutionally advanced LDCs in 1950 (Israel, Japan, South Korea,
and Taiwan) have since become developed nations. By contrast, no
institutionally less advanced country in 1950 had become semi-
industrial by 1973. Most countries at lower levels of socio-
institutional development experienced low rates of growth of per
capita GNP. In the few with high growth rates, economic growth was
almost entirely oil and resource based, was not self sustaining,
fluctuated with external terms of trade, did not spread
significantly to the rest of the economy, and did not result in
much social and institutional development.
A corollary from this is that building institutions is one of the
critical tasks of government.

(b) Domestic institutions also matter greatly in explaining
how fast nations sharing similar initial conditions grow and how
widely growth's benefits spread. Argentina, Brazil, Australia and
New Zealand were all land-abundant countries settled by Europeans.
Their development patterns during the 19th century, however,
contrasted sharply, for institutional reasons. In Argentina and
Brazil before 1914, highly mobile capital and labor, land
concentration in the hands of politically powerful domestic elites,
large British capital inflows and British domination of trade and
distribution networks greatly accelerated economic growth but
intensified existing inequality. In contrast, Australia and New
Zealand grew much more equitably as imported British parliamentary
systems and universal male suffrage increased middle and working
class political power. Similarly, during the golden era of post
World War II growth, domestic financial institutions were
particularly important in distinguishing among the transitional
countries intermediate in development levels -- Rhodesia, South
Africa, Indonesia and Bolivia. South Africa and Rhodesia, with
relatively large networks of banks that accumulated private savings
and helped finance industry, transportation and large-scale
agriculture grew much faster than Indonesia and Bolivia, where
financial institutions attracted negligible indigenous savings and
the only long-term finance available was foreign.

(c) The impact of most individual domestic institutions on
development appears to be best described by an S-shaped curve.
There are both ceilings and thresholds to the effectiveness of
specific institutions in inducing either economic growth or
economic development. For instance, we found that, the impact of
further development of market institutions on economic progress
became negligible once market institutions had reached development
levels characteristic of the 19th century firstcomers to the
Industrial Revolution or of today's top third, institutionally most
advanced, developing countries currently. By the same token, it
was not until countries attained political and economic development
levels characteristic of current semi-industrial countries and
degrees of political autonomy characteristic of the, at most,
moderately dependent countries in the 19th century that
parliamentary institutions started exerting significant impact on
growth and distribution.

Where the thresholds and ceilings hit is institution-specific.
In our contemporary results, for example, the ceiling for the
impact of various types of socio-institutional development was
reached first, probably because social development starts very
early and proceeds most rapidly. In contrast, we found no ceiling
to the impact of further development of financial systems on
development in the range represented by even our institutionally
most advanced countries. As to thresholds, countries had to
proceed to the pre-semi-industrial stage before political
leaderships or representative parliamentary institutions could
exert a systematic influence on economic growth or before the
degree of development of tax institutions could affect development.

The third lesson of comparative history and comparative development
is that the process of development has involved a significant
variety of substitutions for incomplete, missing or underdeveloped
domestic institutions, inadequate domestic factors supplies, and
deficient domestic aggregate demand.

The institutions conducive to economic development during
transition were neither immutable nor unique, as Gershenkron
emphasized in his study of late European industrializers. Both
historically and in contemporary transitional economies, there have
been three major sources of substitution for inadequate or missing
domestic elements: domestic governments, foreign institutions, and
international factor and commodity flows. These provided temporary
substitutes for missing or incomplete domestic capital markets,
internal factor mobility, or underdeveloped domestic commodity
markets. Governments in moderately backward countries evolved a
variety of substitutes for deficient domestic elements: they
substituted government (military) demand for manufactures for
deficient domestic aggregate demand (e.g. Russia in the 19th
century); engaged in direct investment and provided investment
finance as substitutes for deficient private domestic savings and
as a mechanism for overcoming coordination failures; and
subsidized industrial development both directly and by sheltering
infant industries from premature international competition.
Foreign international institutions have provided investment
finance, balance of payments support and, during the contemporary
period, policy advice for restructuring the economy and its
institutions and for achieving macroeconomic stability.
International trade has been a substitute for low domestic
aggregate demand thus permitting economies of scale to be realized
in small or poor economies; trade provided a mechanism for
importing modern technology thus substituting for domestic R&D,
and, at later stages, trade has increased efficiency by imposing
the discipline of world market prices on domestic industry.
Finally, direct foreign investment, capital flows and immigration
of skilled workers and entrepreneurs have substituted for
domestically underdeveloped capital markets and human resources.XX
During the Industrial Revolution, the export of capital from Europe
fueled the economic expansion of the land abundant non-European
countries. By 1914, in some developing countries, foreign capital
(excluding investment by European settlers) accounted for as much
as half of total investment. Migration to overseas territories by
European settlers was a major motive force. By 1914, one eleventh
of the world's total population consisted of Europeans living
outside Europe. (Thomas 1973, p 244). These settlers brought with
them financial capital, technological know-how, political and
institutional cultures, trading networks and skills.

The precise mix of substitutes has varied among countries at
similar levels of institutional development, both historically and
on the contemporary scene. Governments, international trade,
foreign institutions and factor imports have not played the same
role in all countries. Thus, for example, the contemporary East
Asian development pattern has entailed a process of: government-
led capitalist development; high government investment and
ownership of industry, with initially substantial foreign aid and
little direct foreign investment; high private and public
investment in human resources and almost no reliance on foreigners;
and a short period of generalized infant-industry protection
followed by export-led growth combined with selective import-
substitution and government promotion of those industries that
would become the core export industries in the next phase of
dynamic comparative advantage; and has resulted in very fast,
widely shared, equitable development. By contrast, the rather less
successful, Latin American pattern has involved a process of
government intervention which is less developmental and more
responsive to pressures emanating from powerful, tradition-oriented
economic elites; a lengthy period of import substitution, starting
with consumer goods and extending to capital-intensive producer and
consumer goods, and combined with subsidies to non-traditional
exporters and constraints upon the sourcing of inputs; moderate
investment rates; moderate levels of human-capital development and
substantial reliance on foreign investment and entrepreneurship in
both agriculture and industry; extensive agriculture, characterized
by the predominance of large owner-absentee commercial farms or
plantations; and has led to moderately dualistic and rather
inequitable development.

Nor is the endpoint of development institutionally identical.
Even among OECD countries, there remains a considerable variety in
institutional structures and government-business interaction
patterns. Financial systems differ substantially between the
Unites States and European countries, and between Japan and other
OECD nations. Labor market institutions, particularly the nature of
labor unions and their roles and the security of labor contracts,
contrast sharply between the United States, continental Europe,
Scandinavia and Japan. Industrial organization varies significantly
as do the roles that governments play in agriculture and industry,
and the mechanisms through which government-influence is exercised.

Nevertheless, the eventual domestic evolution of: complete
domestic markets; land tenure institutions which provide for the
wide distribution of the marketable surplus; educational systems
which provide for widespread access; financial systems which are
effective in mobilizing domestic savings and channelling them into
investment; tax systems which are moderately equitable and adequate
to the provision of government finance ; and fully functioning
political systems based on wide representation, have been critical
to sustained long run economic development. Unless the incomplete
or missing domestic institutions were eventually developed, their
absence ultimately led to economic stagnation.

Institutional development and institutional flexibility and
adaptability have therefore been crucial to the continued long term
growth of follower countries and overseas territories during the
nineteenth century, as well as to contemporary growth. Indeed, it
is the very lack of institutional flexibility, imposed by political
dependence, which was responsible for the growth without
development which characterized the evolution of the land abundant
colonies during the Industrial Revolution period.

The fourth lesson of comparative history and comparative
development is that, among countries similar in institutional
development, economic policies with respect to trade, agriculture,
international factor movements, and investment were critical.
However, the critical policies and governmental actions required in
each of these spheres and their relative effectiveness have
differed by development level.

In the description of critical policies and how they change
with the level of institutional development we focus primarily on
our results for contemporary developing countries, for the sake of
brevity.

The initiation of development in severely underdeveloped
countries entails:
. Investment in social, physical and institutional
infrastructure as well as in export-centered industrialization.
These investments are critical to the generation of external
economies and to the advancement of this set of countries to higher
levels of economic and institutional development.
. Significant social development that helps break down
traditional societies, customary behavior patterns and the sway of
traditional cultures and leads to the enlargement of the domain in
which market-oriented behavior guides economic activity. The
important processes for this purpose were: reductions in the size
of the subsistence economy and increases in narrowly-based,
dualistic, industrialization; the spread of literacy and primary
education; increases in the size of the middle class and rural-
urban migration.
. Foreign skills and foreign capital inflows are needed as
substitutes for underdevelopment of human capital, technology, and
domestic capital markets. Expatriates, foreign advisors, foreign
aid, foreign investment, and turnkey industrial projects could play
a critical role in industrialization and in the management of the
development process in this most underdeveloped set of countries.
. In trade policy, primary exports are needed to provide the
foreign exchange and savings required to fuel industrialization. At
the same time, a process of import-substitute industrialization is
required to permit the initiation of industrial development.
Historically, Britain was the only country that industrialized
without tariffs during the Industrial Revolution period; inability
to adopt import-substitution policies in the 19th century colonies
because of domestic and international political constraints has
resulted in their remaining underdeveloped until today. No
contemporary developing country other than Hong Kong has been able
to start industrialization without an initial period of infant-
industry protection, though there are a few examples of specific
industries in particular countries that entered export markets
without first producing for domestic markets.

To maintain the development momentum requires:
. Adopting a dynamic approach to comparative advantage by
successively moving the economy from resource-intensive, to first
labor-intensive, and then to either skill or capital-intensive
industrial and export structures and fostering the requisite
accumulation patterns in education, savings, and financial
institutions (Balassa, 1979).
. Implementing the dynamic approach to comparative advantage
by shifting trade policy from general import-substitution to
selective import substitution within an export-oriented trade and
incentive regime. This has been the policy of the East Asian
miracle economies and the one to which some of the more successful
South Asian and Latin American economies have shifted more
recently.
. First expanding the enclave-based, narrow, dualistic
industrialization process and then reducing the productivity gaps
among and within sectors by extending reliance on modern technology
throughout the economy.
. Raising both private and public investment rates in
industrial and infrastructural capital in order to expand the scope
of the modern industrial sector, take advantage of scale economies
through coordinated investments, and change the industrial
structure in accordance with the country's dynamically changing
comparative advantage. This entails continued developing of
domestic financial and tax institutions, maintaining appropriate
interest rates, as well as raising rates of return to private
investment through technological modernization and selective,
temporary, incentives.
. Raising the productivity of agriculture while decreasing the
size of the agricultural sector, in order to provide food for the
cities, earn and save foreign exchange and, later, reduce dualism,
release labor and provide a mass market for domestic manufactures.
Land tenure institutions must be adapted to enable agriculture to
perform its dynamically changing functions in support of
industrialization. Specifically, initial land tenure conditions
must hasten the creation of a marketable-surplus through
agricultural commercialization and technology diffusion, while
later land tenure patterns should favor the widespread distribution
of the agricultural surplus.
. Continued foreign investment, foreign technology import, and
foreign capital inflows to supplement domestic savings and effect
transfers of technology to industrial sectors according to the
country's phase in the hierarchy of dynamic comparative advantage.
. Providing a fairly stable economic setting by controlling
inflation and setting realistic exchange rates and adopting a
pattern of social-infrastructure investment that is relatively
balanced among regions, ethnicities, economic sectors, and socio-
economic strata to avoid crippling social tensions, internal wars,
and political instability.
. Active and capable governments that pursue national medium-
term economic goals with respect to industrial policy, investment
allocation, market-intervention, and provide substitutes for
incomplete or missing markets and market failures.
. Governments with sufficient autonomy so that they can shift
policies and forge the institutions needed for continued
development, and, towards the end of this phase, engineer the
institutions and policies required to effect transition into the
next phase.

The transition to OECD status necessitates:
. Emphasis on productivity growth through technology and price
policies including not only industry but also agriculture.
.Emphasis on the competitiveness of the domestic industrial
structure through opening up the economy to international trade,
dropping subsidies to mature industries, generating appropriate
industrial organization, and un-repressing financial markets.
.Emphasis on fostering domestic competition through changes in
industrial organization, removal of impediments to entry, and
neoclassical trade policy.
. Shifting to a more balanced growth process that provides for
the wider sharing of benefits to reduce economic and social
instability and generate mass domestic markets for manufactures
.Establishing governmental structures that allow for wide
political participation, power sharing, and middle class and labor
interest representation.
.Shifting the functions of government away from industrial
policies to watchdog functions that: correct the excesses of
unfettered capitalism, through enforcement of antitrust and worker-
safety legislation; shelter the population from excessive risks
through safety-net provision; ensure civil safety and punish anti-
social behavior; ensure a modicum of equal opportunity through
educational policies, taxation and anti-discrimination measures;
guarantee civil liberties and provide for a judicial and law-
enforcement system that protects individual rights and fair
treatment to all; and maintain a stable macroeconomic environment.

III. Implications for Development Theories.

Development theories, both old-style and new, have suffered
from misplaced universality and from tunnel vision. The menu of
institutions and policies is extensive. And different institutions,
different policy priorities, and different policies are applicable
to countries in different phases of economic and socio-
institutional development. Development theories must therefore be
changed to take full cognizance of historical and situational
relativism and of the multifaceted nature of the development
process.

The most appropriate theoretical description of the economic
aspects of the development process for the least developed 40% of
countries that are engaged in constructing the economic, social
and political institutions and infrastructure required to initiate
a development process is offered by the Lewis model. But the Lewis
model must be restated so that it becomes an open-economy model
with trade in primary goods used to collect potential primary-
sector savings and transform them into investible resources in
dualistic industrialization. Moreover, at this stage,
anthropologists have much to teach economists about how the
penetration of markets affects and is affected by traditional
societies.

The subsequent, early phase of building development-momentum
in the next more developed third of developing countries, is best
described by Rosenstein-Rodan and Nurkse type, big push models.
These models center on raising investment rates significantly and
directing the investment to the creation of both economic and
institutional, infrastructure and to the coordination of
investments in externality-generating industries. The important
economic institutions in this phase are the financial ones, which
enable aggregating savings and directing them towards appropriate
investment channels. The important actors in this process are
governments whose primary function is to build up economic and
institutional infrastructural capital; coordinate investment
activities; provide finance for investment; raise incentives for
private savings and investment; develop human resources and
entrepreneurship; and maintain checks upon the divisive socio-
political processes which persistent dualistic development
engenders. At this stage, international trade continues to
promote the aggregation and redirection of savings and the
accumulation and redirection of foreign exchange. Appropriate
trade policy is generalized infant-industry protection, which is
required to enable the creation of an industrial base and lead to
structural change away from an economy centered on a primary
sector. Thus, neoclassical development theory is plain wrong for
this stage.

Once economic, institutional, and social development have
proceeded to the point at which countries are ready to enter the
semi-industrial stage, our analysis suggests that continued
development requires: a big-push on the buildup of institutional
and human capital, with emphasis on broadening access; continued
emphasis on high investment rates; the extension of the scope of
modernization to encompass agriculture and the expansion of
technological modernization within the industrial sector, thus
widening the spread of benefits. This phase entails a shift in
trade policies away from generalized import substitution to export
promotion combined with selective import substitution centering on
fostering the industries needed to climb the next rung of the
ladder of comparative advantage. It also entails continued buildup
of financial institutions, tax systems, removal of institutional
barriers and buildup of the institutions needed to complete
markets, "get prices right", and increase competitiveness. And it
also entails a shift in government activity away from generalized
finance of direct investment and generalized coordination of
investment towards selective finance and selective industrial
promotion. Developmental governments are essential at this stage
both to promote institutional and social development and to
engineer the requisite shifts in trade policy and in the
government-business balance.

All development theories have some limited applicability to
this relatively advanced stage. Neoclassical theories that stress
open-economy growth, tariff and subsidy reductions, more uniform
tariffs and less generalized bias towards imports, have substantial
validity for this stage with an important proviso: selective
targeting and protection for the buildup of industries which are
either skill or capital-intensive or a combination of both.
Selective subsidies, protection, and credit and foreign exchange
targeting are needed if the economy is not to be locked into static
comparative advantage that blocks further development. Chicago
school theories centering on the buildup of human capital and
knowledge are also appropriate to this stage, especially if they
are reinterpreted to include the buildup of the necessary
institutional capital required for human capital and knowledge to
be translated into increasing economies of scale (thereby becoming
non-endogenous growth theories), and if they are made
multisectoral. Also important are the development theories
formulated by the pioneers that stress the importance of
governments for increasing the productivity of private resource-use
by undertaking steps aimed at generating externalities, especially
if greater stress is placed on building the economic-institutional
infrastructure for externality-creation and rather less on direct
government investment.

Thus, no development theory is completely irrelevant in this
late phase nor is any theory completely applicable to it without
serious amendment. We are least likely to go wrong in policy
formulation for countries in this phase if we: (1) study each
transitional country's initial conditions, including size, natural
and human resources, economic structure, and institutional
features; (2) form some ideas of the country's economic potential
and the most important barriers to its realization, based on formal
quantitative analysis applying a system-wide conceptual framework
which describes how its institutions work and encompasses all
three major development-theory contenders; and (3) tailor our
policy prescriptions accordingly. The "have-policy-will-travel"
approach to policy formulation is least applicable to this phase.

Finally, the purely neoclassical Washington-consensus
theories apply fully mainly to the handful of developing countries
currently engaged in the final process of transition to OECD
status.

The only universal prescription is that it takes strong, able,
public-spirited, far-sighted, enlightened and committed governments
to forge the institutions and adopt the policies appropriate to
each development phase and engineer the substitutions and
transitions in institutions and policies required to shift between
phases. The very fact that this is a tall order may explain why
the development process has not been monotonic at any stage; why it
took about one generation of development for twenty semi-industrial
countries to emerge; and why only half a dozen developing
countries have so far been able to graduate to OECD status in the
50 years since the post-War development process was initiated.

The other major reason for the limited development success of
the past 50 years is the nature of the guidance developing
countries have received from development economists and
international institutions committed to the principles of
"universality-of-theory-and-policy" and "simplicity-of-theory-and-
policy". Inappropriate institutions and policies cannot avoid
delaying or altogether blocking development. As we have seen,
development history suggests that policies and institutions are
context specific and do not transfer well across development levels
characterized by very different institutional settings and initial
conditions. The principle of Occam's razor may help illuminate
certain facets of development within well defined ranges of
institutional development, but it generally constitutes an
impediment to the formulation of appropriate development policy in
specific countries characterized by particular institutions and
particular initial conditions. Our studies have demonstrated that
there are a multiplicity of development paths and a multiplicity of
aspects of institutional and social change, with different
interaction patterns among institutions and policies along each
path and at each development level. Our studies have also
demonstrated the importance of institutions to the development
process. All modern development theories, except the informal ones
of Hirshman and Myrdal, either neglect or underemphasize
institutions. (The 19th century classical economists, who lived
through an era of rapid institutional change, are, incidentally,
not subject to this criticism. Their writings are littered with
institutional analysis and with recommendations for changes in
domestic and trade institutions).

IV. Conclusion

Economic growth has been at best stalled for the overwhelming
majority of developing countries since 1981. But there is hope. The
last decade and a half has been one of substantial institutional
restructuring in a large number of LDCs and the beginnings of
restructuring of the global trading environment. It is hoped that
there will be a resumption of economic growth and development in
LDCs in the near future. Such resumption will require: (1) a better
understanding of the need to tailor institutions and policies
appropriately to the particular country's moment in history.
Situational relativism must become commonly accepted by academic
development economists as well as by policy makers, both within
developing countries and in the international development-policy
community; (2) the restructuring of the global trading regime and
international payments system so they become more appropriate to
the development and growth needs of all countries, developed or
developing; and (3) an acceleration of economic growth in the OECD
countries.